Daily Newsletter, Saturday, 02/04/2006

Table of Contents

Market Wrap

Not Done Yet

by OI Staff

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Just when investors thought it was safe to go back into the market additional
Fed rate clouds appeared on the horizon. The economic reports for the week have
put the fear of the Fed back into investors. The idea of one-and-done
self-destructed as indicators of economic strength and rising inflation became
headlines
once again.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - 30 min

The
Jobs report on Friday came in weaker than expected with a headline number of
only +190,000 when analysts had expected +250,000 to as much a +300,000. On the
plus side there was an upward revision to the prior two months of +81,000. This
was good/bad news as the headline number disappointed but upward revisions
suggested stronger growth than previously thought. The unemployment number fell
to 4.7% and the lowest rate since mid-2001. This was a drop from 4.9% in
December.
However, the method of measuring the unemployment rate has changed and
the data has been adjusted and may not be comparable to prior reports. Jobs in
December were revised up to +140,000 and November was revised up to +354,000.

The bad news came in the form of a +0.4% jump in average hourly earnings for the
second straight month. November was flat but October posted a +0.6% gain. The
sudden sharp rise in earnings suggests wage inflation has begun and the Fed will
have to shift into offensive mode to combat the problem. Hourly earnings have
grown +3.3% over the last 12 months. This is the strongest jump since early
2003. With the employment rate falling, hiring lagging estimates and wages
rising it is the perfect storm for the Fed. Confirming the concerns in the
employment report was the Productivity report on Thursday. Hourly productivity
output fell by -0.6% in Q4 while wage costs jumped +3.5% for the same period.
This was the first decline
in productivity since Q1-2001.

IIf you recall I discussed last week that the market had priced in a one-and-done
scenario for the Fed after a drop in Q4 GDP to only +1.1% growth. I warned that
a Fed surprise could be detrimental to the markets. The Fed cooperated on
Tuesday by taking the measured pace language out of the statement and moving to
"further policy firming may be needed" instead of the "will likely be needed"
stance. The Fed appeared to be
moving to neutral at 4.5% after 14 consecutive
hikes. The new language was satisfactory while not really suggesting a halt. The
language moved to a stance that would be driven by economic factors. That was
the problem. The economic factors took a sudden turn higher after the meeting.
The ISM only fell to 54.8 from 55.6 on Wednesday and much better than the
whisper numbers in the 52 range. Chain store sales soared +5.1% for January and
much better than the +3.5% growth in December. Signs
are growing that February
sales will also be strong. Construction spending jumped +1.0% compared to +0.5%
in the prior month and well over the +0.1% consensus estimate. Vehicle sales
jumped unexpectedly in January to a 17.3 million rate and the first sales gain
in months. 2006 is expected to be the weakest sales year for automakers since
1998 and a sudden jump in sales was surprising. Jobless claims are falling with
weekly numbers hitting lows not seen since mid-2000.

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This sudden burst of good economic data along with the sharp spike in wage
inflation and dip in unemployment sent the Fed funds futures into overdrive.
Instead of
the one-and-done scenario favored just a week ago we are now looking
at a strong possibility of at least two more hikes. The futures are projecting
better than a 50% chance of a 5.0% Fed rate after the May meeting. Surprised by
the sudden turn of events investors began taking profits.

Economic events were not the only factor pressuring the market last week.
Negative earnings surprises continued to appear and some from very high profile
companies. Guidance continues to be
weaker than expected from a broad range of
sectors. S&P said Q2 earnings would likely break the string of double-digit
quarters dating back nearly four years. S&P estimates are for earnings growth
have fallen to only +7.7%. Rising inflation, rising rates and slowing earnings
are not a recipe for a bullish market. The markets rolled over after the Fed
meeting when resistance proved too strong for a questionable future. Markets
want to rally on the final Fed rate hike in any series
and the sudden change in
outlook from one-and-done in January to at least two more through May was too
much bad news. If the Fed did halt in May it might not attract too much investor
interest since that would correspond to the beginning of the "sell in May and go
away" six month cycle. Add in a drop in earnings expectations into single digits
and suddenly the outlook for investors dimmed considerably.

Markets reacting to the storm clouds on the horizon could
not even shake off the
gloom after a -$5 drop in oil from $69 on Wednesday to $63.90 on Friday. There
was an initial reaction spike in equities but it was quickly sold. Oil prices
are finally showing signs of collapsing after holding near their highs for
nearly a month. The price of oil has been holding at an abnormal level due
mostly to geopolitical concerns. As the week drew to a close the International
Atomic Energy Agency (IAEA) delayed a decision on sending Iran's nuclear plan
to
the UN Security Council. The 35-nation board of IAEA governors had opened an
emergency meeting on Thursday in Vienna. The meeting will continue on Saturday.
Politics is playing a crucial part in the decision with various countries
lobbying for their own interests. One sticking point is the discussion of a
Middle East nuclear weapons free zone. Since Israel is already thought to have
nukes it would be a challenge to ignore them in the context of the zone. It
appeared late Friday
that tensions were cooling as many proposals for resolution
continued to surface. Russia wants a delay until the March meeting to give
diplomats more time to work. The U.S. also appeared to be softening in regard to
the timing of a decision. The U.S. does not want to be seen as the instigator of
action against Iran. This cooling of tensions sent oil prices spiraling down
from their highs.

CCrude Oil Chart - 60 min

Oil has been trading with about a $10 risk premium built into the price. When
Venezuela sided with Iran last week the prices rose to hit $69 on Wednesday.
According to the EIA oil inventories rose +1.9 mb in the week ended Jan-27th.
The API showed a larger rise of +5.9 mb. The EIA showed a gain of +4.3 mb of
gasoline while the API showed a gain of +3.7 mb. Crude inventories totaled 321
mb according to
the EIA. This is well above the five-year average for this week
of 289 mb. Gasoline, jet fuel, distillates and fuel oil are also above their
five-year averages. Despite forecasts for colder than normal weather over the
next 15 days there is almost no scenario that would produce a significant draw
in supplies. Refineries are shutting down for maintenance and to convert from
heating oil to gasoline for the summer driving season. This will continue on a
staggered basis for another six
weeks. I have been telling everyone for several
weeks that conditions were not supporting the rise in oil prices. The hurricane
impact took a substantial portion of demand off the market in Q4 and this
allowed crude inventory to build significantly above normal levels. Eventually
this bubble had to burst as the spring demand slump arrived. While the Iran
story has yet to play out I believe there is a good chance it will be delayed
until March. This should allow prices to correct and
take some pressure off
equities. The challenge now is to pick the bottom of the correction in
preparation for going long energy once again.

The OPEC meeting last week was a neutral event with prices nearing $70 once
again. The prospect of a production cut to defend prices at $55 was laughable.
They satisfied themselves with the threat of a production cut after the March
meeting and a couple warnings that prices could hit $100 if something happened
to Iran's output. With
their bank accounts overflowing with cash and no real
demand drop in sight despite the $69 oil a back slapping good time was had by
all. I would personally like to see them slow production to support prices and
then get behind the curve again like they did in 2005. The global economy is
still growing and the next time OPEC screws up while trying to be cute and
protect prices it could have dramatic consequences.

Greenspan has moved off the firing line and into the history
books with his term
as Fed Chairman now over. CNBC celebrated his retirement by having artist Erin
Crowe, a painter of Greenspan portraits, paint her last portrait of Greenspan on
the air on Tuesday. CNBC auctioned the painting off on Ebay and will give the
proceeds of $150,400 to charity, Autism Speaks. Could this price be true
"irrational exuberance"? Not bad for an artist whose previous high for a
painting was $12,000. I am sure Bernanke is just hoping somebody will want
to
paint a picture of him rather than burn him in effigy when he leaves the post.
Remember, Greenspan took office in 1987 only two months before the biggest
market crash in history in October 1987. He recovered from that disaster and
managed to forge a significant legacy. If I were Bernanke I would be very
concerned about the next few months of this aging recovery and I would want to
be very careful I did not make that one extra hike that breaks our economic back
and produces a severe
recession.

The four horsemen of the Internet rode into the sunset on Friday after Amazon,
the last of the group, reported earnings Thursday night. Maybe I should say they
hobbled off into the sunset. It has not been a pretty picture with Yahoo, Ebay,
Google and Amazon all disappointing in some form. Ebay was punished the least
after a couple upgrades erased some soft guidance. EBAY rallied to $48 on the
upgrades the day after earnings but quickly entered a downhill slide,
which
accelerated as each remaining Internet stock confessed their sins. EBAY finished
the week at $40.50 but that -$8 loss was kind compared to the -$50 drubbing
suffered by Google. Amazon was the final act with its earnings miss and -10%
drop on Friday. After YHOO, EBAY and GOOG expectations for Amazon were already
lowered. It did not take long before the old Amazon.bomb nickname penned
originally by Barron's returned to print where I saw it several times on Friday.

It
was a bad week for the indexes with the highs for the Nasdaq and SPX set on
Monday. The Dow managed to hold its ground and set its high on Wednesday on good
news from GM and Boeing. However, before the week was out the results would be
the same across the board. All the major indexes lost more than 1% for the week
with the NDX dropping -2.72% thanks to a -$50 drop in Google. The SOX dropped
-4% on the largest decline in semiconductor billings in over a year.
Semiconductor billings
for December fell -2.3%. This is a three-month moving
average so the actual number was probably much lower. Notable declines this week
were MOT -7%, AMD -7%, QCOM -6% and RMBS -15%. Let us not forget the Intel
massacre of -19% since their earnings on Jan-17th. Despite the -5.5% decline in
the SOX since the high on Jan-27th the SOX at 529 is still well above support at
515. Chips have been on fire since the October low but that rally appears to be
fading. Despite the high profile
disappointments by some chip companies this is
probably just a normal sector rotation rather than a new direction. The fourth
quarter is typically kind to chip companies in anticipation of a wave of
seasonal profits. The first quarter is typically soft for tech and it is only
natural for rotation to occur. Chips benefit from the January effect and in case
you havent noticed the calendar turned over last week.

SOX Chart - Weekly

The January effect is typically seen late in Q4 and early in January as year-end
fund flows migrate into small cap stocks, primarily techs. The Russell 2000 was
the primary beneficiary of these fund flows and a new high of 736.45 was set on
Wednesday. Given the changing economics, weak earnings guidance and strength of
the Oct-Jan rally it should be time for small caps to rest. February and
March
typically produce volatility in the Russell as fund managers rotate out of
stocks and sectors that have outperformed. It is not a fundamental change but
only a cyclical event..

On a purely technical basis the Dow posted a lower high last week and closed
Friday right in the middle of its recent range at just under 10800. Initial
support is just under 10700 at 10675 but without the benefit of earnings hype
this may be only a bump in the road as sector rotation accelerates
in February.
On the Nasdaq the close at 2262 is only +20 points above initial support at 2240
with 2200 not far below.

WWe have been using the SPX as our index of choice for deciding which direction
we should trade. Last week the SPX broke out of resistance at 1275 and tried
valiantly to crack the next level at 1285. After three days of failure a feeling
of resignation began to settle in and upper level support at 1280 finally broke
with a straight drop through our
neutral zone between 1270-1275. The 1270 level
attempted to hold the drop but was unsuccessful. The recommendation for the last
several weeks was to be flat or short under 1270 and that puts us into a short
bias for the week ahead. The SPX was actually the weakest link for the week with
a Friday close very close to critical support at 1260. This was probably due to
the implosion in the energy sector after the price of oil finally cracked. That
makes it a little harder to predict for
next week since energy is due for a
bounce. One that will likely fail but still a bounce. That would probably bring
the SPX back into parity with the Dow and Nasdaq but still maintain a negative
bias.

Russell Chart - Weekly

NYSE Composite Chart - Weekly

The indexes still maintaining a bullish bias are the Russell and the NYSE
Composite. The Russell has intermittent support from 700 to 720 and any decline
is not likely to be sharp. Dip buyers should appear about every 5 points. The
NYSE Composite has been very bullish since the October lows and set a new high
at 8130 on Tuesday after the FOMC meeting. That high lasted about one day before
investors began taking profits and the
index declined to 8000 at Friday's close.
Critical support at 7950 is only one good decline away and a level where buyers
should appear. If they are unsuccessful the next stop could be just under 7800.

The bottom line for me next week is boredom. The economic calendar is sparse and
the majority of earnings excitement has passed. Oil pulled back to support at
$64 and buyers appeared at the close on Friday. This could have been just short
covering but it may have been strong
enough to attract attention from those
looking to buy the dip. I hope it was just a false bounce from short covering. I
would love to see crude return to real support at $58 and a very good entry
point for a summer surge. However, I did buy the dip with some speculative
positions on Friday just in case the dip to $64 is all we are going to get. On
the broader market it is about time for the post earnings depression to appear
and I would be very careful getting married to any long
positions, even in
energy. Continue to honor the SPX 1270 short indicator and the 1270-1275 neutral
zone. Remain short under 1270 and cautiously long over 1275. I say cautiously
long because my fundamental bias has become more negative. I don't want my bias
to get in the way should a new rally break out so I will only be cautiously long
over 1275 and suggest you do as well.

New Plays

New Option Plays

by OI Staff

TABLE-->

Call Options Plays

Put Options Plays

Strangle Options Plays

None

ABK

None

IBM

MTG

New Calls

None today.

New Puts

Ambac Fincl. - ABK - close: 76.09 change: -0.60 stop: 78.05

Company Description:
Ambac Financial Group, Inc., headquartered in New York City, is a holding
company whose affiliates provide financial guarantees and financial services to
clients in both the public and private sectors around the world. Ambac's
principal operating
subsidiary, Ambac Assurance Corporation, a leading guarantor
of public finance and structured finance obligations, has earned triple-A
ratings, the highest ratings available from Moody's Investors Service, Inc.,
Standard & Poor's Ratings Services, Fitch, Inc. and Rating and Investment
Information, Inc. (source: company press release or website)

Why We Like It:
The action in ABK looks pretty bearish. Short-term and weekly technicals are
negative. The oversold
bounce from its mid-January breakdown has failed twice
under the $78 level. We believe the stock could trade into the $71.00-70.00
range before finding significant support. That's where the longer-term trendline
from its weekly chart offers support. There is some short-term technical support
at its exponential 200-dma and simple 100-dma near the $74 level so we do expect
a bounce there. Our target is $71.00. Our time frame is four to six weeks,
probably sooner.

Company Description:
IBM is the world's largest information technology company, with 80 years of
leadership in helping businesses innovate. Drawing on resources from across IBM
and IBM Business Partners, IBM offers a wide range of services, solutions and
technologies that enable customers, large and small, to take full advantage of
the new era of e-business. (source: company press release or
website)

Why We Like It:
The GHA hardware sector index looks a bit overbought after a 25% run up from its
late October lows. IBM looks ready to lead the group lower. Investors were not
happy with IBM's latest earnings report and now the stock is breaking down under
technical support at the 200-dma and round-number support at the $80.00 level.
Volume came in more than 50% above its daily average on Friday's breakdown. We
would consider put positions here. However, we
would really like to see some
confirmation. Therefore we are going to use a trigger at $79.49 to open the
play. If IBM trades at $79.49 or lower then we'll target a decline into the
$75.25-75.00 range. The P&F chart shows a triple bottom breakdown sell signal
with a $74 price target.

Company
Description:
MGIC, the principal subsidiary of MGIC Investment Corporation, is the nation's
leading provider of private mortgage insurance coverage with $170.0 billion
primary insurance in force covering 1.3 million mortgages as of December 31,
2005. MGIC serves 5,000 lenders with locations across the country and in Puerto
Rico, helping families achieve homeownership sooner by making affordable
low-down-payment mortgages a reality. (source: company press release or website)

Why
We Like It:
MTG was soaring higher in January until the company missed the earnings
estimates on its January 12th report. The stock has sunk back toward support
near $64 and its simple 200-dma. We suspect that MTG is about to breakdown with
the potential to trade toward the October lows. We'll suggest a trigger to buy
puts under technical support at the 200-dma. Our trigger will be $63.70. If
triggered then we'll target a decline into the $58.00-57.50 range.

Suggested
Options:
Our time frame is about six weeks so we're going to suggest the March puts but
some of our readers might want to consider buying June puts.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

by OI Staff

Call Updates

Apple - AAPL - close: 71.84 change: -0.25 stop: 69.99

Has AAPL reached a new bottom? We've been suggesting that AAPL should find
support near the $70.00 level. On Friday the stock dipped twice to the $71
region and buyers stepped in both times to defend the stock. Aggressive traders
may want to consider new bullish positions here. Our concern is the NASDAQ,
which looks vulnerable. The strongest stock in the world will struggle to climb
if the markets are sinking. Just imagine a hot air balloon trying to rise in an
elevator moving lower. The balloon is going to go down in spite of its own
strength. Now there
are always exceptions and some of you will be quick to point
out that this is a market of stocks and we're not betting on the stock market in
general. Unfortunately, we wouldn't list AAPL as the strongest stock right now.
We listed AAPL as a speculative play given the bullish engulfing candlestick and
its bounce from $70 a few days ago. There has not been a very strong follow
through and the weekly chart looks very bearish! Conservative traders may want
to exit early. We will consider
bailing out of AAPL bounces and fails to clear
the $75 region soon.

Suggested Options:
We are not suggesting new bullish positions in AAPL at the moment.

AET continues to show relative strength. The stock added another 1.3% on Friday
despite the widespread pull back. The stock looks poised to hit our target in
the $99.00-100.00 range. Honestly, considering the weakness in the major
averages we strongly considered just exiting early right here. More conservative
traders may want to jump out now for a profit. We are not suggesting new bullish
positions. We are
raising the stop loss to $93.99. Conservative traders who
don't choose to exit early might want to put their stop closer to $96.

We are amazed. The trading in CMI on Thursday looked very bearish. We were
expecting to be stopped out on Friday. Instead shares of CMI bounced strongly
from the $97.00 level. While our bullish play in CMI has been given new life we
are not suggesting new bullish positions right here. The major market averages
look vulnerable and more conservative traders may just want to
thank their lucky
stars and jump out of CMI right here to minimize their losses. Or as an
alternative you could raise your stop loss. We are raising our stop loss to
$96.95, under Friday's low. We would not consider new positions until CMI hit a
new high over $102.00.

Suggested Options:
We are not suggesting new positions in CMI right here.

Friday's bounce from the $89.50 region looks like a new bullish entry point to
buy calls on ESRX. The stock has been relatively resistant to any profit taking
following its bullish breakout over resistance near $90 several days
ago. We
would consider new call positions here but more conservative traders may want to
wait for a new high before initiating positions. Currently our stop loss at
$87.45 is under technical support at the rising 50-dma. More conservative
traders might want to consider putting their stop under Friday's low instead.
Our target is the $99.50-100.00 range but we're running low on time with ESRX
due to report earnings in the last week of February.

The recent failed rally in UHS is starting to look a bit more serious. Shares
may need to retrace to the $48.00-47.50 region before attempting another
breakout. We remain on the sidelines. Our trigger to buy calls is at $50.51. If
triggered then we'll target a rally into the $54.50-55.00 range. The P&F chart
is bullish with a $61 target. We
do not want to hold over the late February
earnings report.

Put
Updates

Johnson Controls - JCI - cls: 67.91 chg: -0.91 stop: 72.01

Good news! JCI has continued to slide and Friday's 1.3% decline pulled shares
under technical support at the 100-dma. The stock looks ready to fall towards
our target in the $65.50-65.00 range, above its exponential 200-dma. Currently
the Point & Figure chart looks pretty bearish with a $57 target.

Suggested Options:
If you are looking for a new put position in JCI we
would consider the March
puts although Aprils have more open interest.

Reversal alert! We are very
surprised by the turnaround in MTH on Friday. The
stock is still stuck in a bearish longer-term trend dating back to its August
peak but short-term MTH is suggesting a turnaround. Friday's session produced a
bullish engulfing candlestick pattern on top of a 2.9% gain. More conservative
traders, if you entered new positions on Friday, might want to bail out quickly
to minimize any losses. We suspect that MTH will make a rally attempt toward
short-term resistance at $62.00. Our stop loss
is at $62.05 and we're going to
keep the play open and see how far MTH will bounce.

Suggested Options:
We are not suggesting new plays in MTH at this time.

We do not see much change from our original play description from Thursday
night. The one thing we would say is that Friday's session was not a very
convincing follow through on Thursday's technical bearish reversal. Traders
might want to consider waiting for PD to trade under Friday's low (157.21)
before initiating new positions. Our original play description is reposted here:

We are fundamentally
bullish on PD. The company is a major player in the
copper-mining industry and the commodity has been hitting new highs for a while
now. Demand seems to be outstripping supply for the malleable metal. PD's recent
earnings report came in above expectations and management issued a big buy back
program. Both events are positives. Yet shares of PD appear to have gotten ahead
of themselves. Today's trading hit a new all-time high and then crashed. The
move produced a big bearish engulfing
candlestick, which is typically a bearish
reversal pattern. This is an aggressive, higher-risk bearish play since we are
trying to time a pull back toward its trendline of support. We're going to
suggest put positions here (under $160) with a stop above today's high. More
conservative traders may want to wait for PD to move under $158 or $156 before
initiating positions. We are aiming for the simple 50-dma, currently at 144.50,
but since the moving average is naturally a moving target
we'll use an
exit/target range of $147.50-145.00 for now.

XMSR continues to sink, hitting new one-year lows. Shares do look very oversold
and way overdue for a bounce. We would not suggest new put positions here. XMSR
could easily rebound back to the 10-dma (now at 26.45) before sliding lower
again. We are lowering
our stop loss to $27.01. We plan to exit ahead of its
earnings report. Currently we have an unconfirmed report date of February 9th.
Our target is the $21.00 level.

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call
and an OTM put on the same stock. The strategy is neutral. You do not care what
direction the stock moves as long as the move is big enough to make your
investment profitable.)

---

Building Materials - BMHC - cls: 78.27 chg: +1.51 stop: n/a

Earnings from
BMHC are just around the corner. When the company announces on
Tuesday, February 7th this week we'll expect some volatility and probably see
shares move in a new direction instead of this choppy, sideways action. We are
not suggesting new strangle positions at this time. The options in our strangle
play are the March $90 calls (BGU-CR) and the March $70 puts (BGU-ON). Our
estimated cost is $8.20. Our target is $12.50 by March expiration.

Suggested Options:
We are not
suggesting new strangle positions in BMHC at this time.

ECA has pulled back along with the rest of the
oil sector and crude oil futures.
The stock might continue to churn sideways between $45 and $50 until its
earnings report on February 15th. We're not suggesting new positions in ECA
right now. Our strategy involves the April $50 calls (ECA-DJ) and the April $40
puts (ECA-PH). Our estimated cost is $3.45. We are aiming for a rise to $5.95.

Suggested Options:
We are not suggesting new strangle positions in ECA at this time.

Shares of GOOG are on the move and the stock lost 3.6% on Friday although GOOG
closed off its worst levels of the session. Currently the stock is
flirting with
the simple 100-dma ($383), which was support back in October. We are not
suggesting new positions. The put side of our high-risk, speculative strangle is
the February $420s (GOP-ND). These puts hit a high of $46.40 on Friday and are
currently trading at $39.30bid/$40.00ask. Our estimated cost was $40.10 and
we're aiming for a rise to $60.00. You may want to adjust your own target to
whatever you deem is appropriate (whether that's an exit at $50 or $70 or
something
else). It might be wise to exit early since GOOG is fast approaching
what looks like support at the bottom of its rising channel (see chart). Just
remember that the February options are running out of time with just two weeks
left of life.

Suggested Options:
We are not suggesting new strangle positions in GOOG at this time.

Picked
on January 29 at $433.49
Change since picked: -51.94
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 11.1 million

---

Ryland Group - RYL - close: 71.00 change: +2.22 stop: n/a

Homebuilding stocks bounced on Friday and RYL did so with volume coming in above
average. The afternoon rebound did stall under its 200-dma but the bounce may
not be over yet. We're not suggesting new positions. Our play involves the April
$80
calls (RYL-DP) and the April $70 puts (RYL-PN). Our estimated cost is $7.00.
Our target is $12.00.

Suggested Options:
We are not suggesting new strangle positions in RYL at this time.

Target achieved. Positive broker comments, a reiterated buy rating, and a new
higher price target did the trick for us on SFCC. The stock gapped open at
$25.69, fell back to $24 and then rebounded again. Our target was the
$24.50-25.00 range but due to the gap higher we're adjusting our exit.

Dropped Puts

Dropped Strangles

Trader's Corner

Step Away from the Computer

by OI Staff

Knowing when to stop trading proves as important as setting up a system for
trading. This last week provided traders with a prime example.

Annotated 7-Minute chart of the SPX:

The immediate post-FOMC reaction was a series of wide swings that eventually
tamped down into a chartable formation,
a triangle. That settling into a
formation more than a day in the making allowed wise traders to watch for an
opportunity to play a breakout. That breakout was to come to the downside on the
SPX about 10:30 Thursday morning when the SPX broke through the trendline then
at about 1278. As of this writing Friday morning, the SPX had reached a low of
1261.02. The patient trader was well rewarded for that patience. The trader who
must trade every day may have participated in the
bearish gains, too, if that
trader guessed correctly, endured the pre-FOMC ennui without bailing and wasn't
stopped on the post-FOMC swings. Some would rather miss that boredom-to-terror
trajectory.

Although its pattern was different, the more volatile SOX also saw price
patterns pre- and immediately post-FOMC that would have whipsawed many traders.

Annotated 7-Minute Chart of the SOX:

Such activity can also be seen surrounding announcements that participants
widely expect to move the markets. An economic number that might impact a
rate-hike decision, a market general's earning's report or an OPEC decision at a
sensitive time number among those kinds of events.

While the January option expiration Thursday proved different, many traders note
a tendency for equity and equity index prices
to be pinned at certain levels
beginning about mid-morning Thursday during option expiration week.

Annotated 15-Minute Chart of the SPX:

Again, the patient and experienced trader might have expected an untradable
pattern near option expiration and have waited for a more tradable pattern to
set up. Since that rather neutral
triangle--it's perhaps slightly more bullish
than neutral--formed after a climb, the anticipated break might have been to the
upside, so anyone guessing about next direction late in opex week might have
guessed wrong.

Light-volume holiday weeks also present their own challenges, but they tend to
come in two varieties: prices that chop around or big price movements that come
out of nowhere, with big moves made possible by the light volume. Examples of
both occurred near
last Labor Day.

Annotated 15-Minute Chart of the SPX:

These provide a few examples of instances when it's better to step away from the
computer and not click that mouse. Others include times when known price
patterns do not predict eventual movements. Over the previous month, many
technical traders complained about a persistent
underpinning of the markets that
renders technical analysis less useful than at other times. Until recently,
breakdowns did not see follow-through to the downside. Chart patterns signaled
breakdowns that never came. When a strong trend persists but warning signs begin
to appear, trading in the direction of the trend may be the only trade that's
workable, but even the active trader should consider lessening position size in
such a market.

All examples listed here reference
external events. Other articles have dealt
with other issues related to a trader's experience, such as not trading during
times when work or family stresses do not allow clear focus or attention to
trades, when frequent losses drive the need to make up the losses, or even when
frequent gains have created an I'm-a-genius attitude. Those cautions should not
be ignored, either.

Traders should love what they do. They should want to trade, or they're in the
wrong business.
However, experienced traders know that times exist when it's
best to step back and not trade. This article addressed a few of those times.
Occasionally a price movement that might have been wildly profitable will occur
after a patient trader has determined not to trade on one of those days. Oh,
well. Other trading opportunities will arise. Learn when to step away.

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.

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